How Important Is Brand ‘Marlboro’ To Altria’s Profitability in 2019?

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MO: Altria Group logo
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Altria Group

Altria Group Inc. (NYSE: MO), one of the world’s largest producers and marketers of tobacco, cigarettes, and related products, ended 2018 with marginally higher revenues compared to the previous year, mainly driven by growth in smokeless products. Altria was adversely affected by lower sales from the company’s smokeable products’ division due to a reduction in sale of cigarettes. Marlboro, the largest brand of cigarettes, contributes 85% of segment sales and 75% of total revenue for the company. However, the market share of the brand has seen steady decline over the last two years, which is expected to diminish further. Our analysis shows that a decrease in Marlboro’s market share (which is currently 43.0%) to 40.0%, could lead to a decline of over 7.7% in Altria’s adjusted EPS, which could drop to $4.52 in 2019, from $4.89 in 2018, and $5.32 in 2017.

You can view our interactive dashboard – Declining Market Share Of Marlboro Poses A Significant Threat To Altria’s Profitability In 2019 – and make changes to our assumptions to arrive at your own estimates for revenue, margin, and EPS of the company.

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Lower Cigarette Sales

In 2017, about 249 billion cigarettes were sold in the US, which was 3.5% lower than the 258 billion sold in 2016. Sales were lower in 2018 and are expected to decline further in 2019. This is primarily driven by an increase in sales of non-combustible products. Increased awareness and health consciousness have led to today’s youngsters preferring e-cigarettes over the traditional ones. Marlboro, which is the most valuable cigarette brand, has seen its market share decline from 43.3% in 2017 (it was 43.8% and 43.7% in 2015 and 2016), to 43.0% in 2018.

Marijuana, which is preferred by youngsters because of health concerns and its medicinal qualities, was recently legalized in several US states and Canada, which is expected to accelerate the rate of decline in Marlboro’s market share. At a market share of 43.3%, Altria sold close to 100 billion units of Marlboro cigarettes, which came down to 94.7 billion units in 2018. If the market share declines rapidly to 40% this year, then the number of units sold could sharply reduce to about 82 billion for 2019. This could bring down Marlboro’s share in revenue of Altria’s smokeable products segment to 84.0% from 86.0%. In such a scenario, a price increase is the only alternative for Altria, which the company has resorted to over the last few years. However, a reduction in volume could far outweigh increasing prices, reducing revenues from the company’s smokeable products’ segment to $20.6 billion, 7.6% lower than 2018.

As Altria is currently focusing on its smokeless products segment through organic and well as inorganic growth, revenues from this segment are expected to see healthy growth of about 20% in 2019. However, a decline in sales of Marlboro could more than offset any gain in the smokeless segment, causing total net revenue to decrease by over 4.7% compared to 2019.

Marlboro is also the most profitable brand for the company, contributing the most to Altria’s net margin. A decrease in volume sold would hit the company’s margin. In case of reduction in Marlboro’s market share to 40%, we expect Altria’s net margin to decline to 35.0% in 2019, from 36.1% in 2018 and 40.0% in 2017, thus reducing net income to $8.5 billion in 2019, from $9.2 billion and $10.2 billion in 2018 and 2017, respectively.

The importance of brand Marlboro to Altria is reflected in its influence and weight in the company’s profitability, which could decrease by 7.7% with a 3.0 percentage point decline in the brand’s market share. Altria recently announced the acquisition of a 35% stake in JUUL Labs, which is expected to provide Altria great exposure to, and benefits from, the sale of smokeless products. However, fresh concerns related to regulation of e-cigarettes have taken the sheen out of the deal. JUUL is the company at the forefront of the FDA commissioner’s crusade against teenage e-cigarette usage. Any harsh regulation or partial ban on these products would be a huge setback for Altria. In such a case, Marlboro becomes more important for the company than ever before. The company’s management too has acknowledged the importance of stabilizing Marlboro for the overall profitability of Altria. Thus, it would be ideal to have a balance between non-combustible segment growth and maintaining the share of Altria’s biggest brand. However, based on current trends and our analysis, a diminishing market share of Marlboro, and declining profitability of the company, is the most likely scenario to materialize over 2019.

 

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